Investors Return to Spain as Surplus Reaches Record

By Emma Ross-Thomas and Ben Sills -
Oct 31, 2012

Spain posted its second current
account surplus in the euro’s history and foreign investors
increased their holdings for the first time this year, helping
Prime Minister Mariano Rajoy’s campaign to resist a bailout.

The current account showed a surplus of 1.24 billion euros
($1.6 billion) in August, the Madrid-based Bank of Spain said
today, compared with 500 million euros in July, when the nation
showed its first surplus in the euro’s history. Foreign
portfolio investment showed an inflow of 2.34 billion euros in
August, the first positive reading since February 2011.

The data, which spurred gains in Spanish bonds and stocks,
follows yesterday’s figures showing the central government’s
deficit narrowed in September, buoyed by tax increases. Such
reports may bolster Rajoy’s argument that he doesn’t need to
trigger the European Central Bank’s bond-buying program by
signing up to a European rescue package.

Spain’s 10-year bond yield, which rose as high as 7.75
percent before the ECB proposed buying bonds of cash-strapped
nations in August, fell to 5.61 percent at 11:47 a.m. in Madrid
from 5.67 percent yesterday. The Ibex-35 (IBEX) main share index rose 1
percent.

“The data has improved a lot but I wouldn’t get too
excited,” Jose Carlos Diez, chief economist at Intermoney SA in
Madrid. “Portfolio investment is coming in, but it depends on
ECB bond-buying and rating agencies” not downgrading Spain.

Not Indispensible

Rajoy has hesitated since August on whether to trigger the
bond-buying facility, and said this week it wasn’t
“indispensable” even as he faces increasing pressure from
investors and some European peers to do so.

Spain, whose current-account deficit swelled during its
debt-fueled boom, is now relying on exports to drag the economy
out of a five-year slump as its 25 percent unemployment rate
weakens domestic demand. As the government seeks to reduce the
nation’s dependence on foreign financing, it is implementing
measures such as cuts to labor costs to make Spanish goods more
competitive abroad, while raising taxes on consumption.

“A significant amount of the improvement is structural,”
said Gilles Moec, co-chief euro-region economist at Deutsche
Bank AG in London. “All this should put into question the whole
‘competitiveness obsession,’ whereby Spain was doomed to go
through years of deflation to rebalance its current account.”

Sign of Recovery

Economy Minister Luis de Guindos, who forecasts a balanced
current account this year, has repeatedly argued that in Spain’s
previous crises, the return to a current-account surplus marked
the start of the recovery. Spain’s “fundamental ambition” is
to correct “all the imbalances that led to the current
situation,” he said on Sept. 6.

Budget data yesterday showed the central government’s
shortfall was 4.39 percent of gross domestic product in the nine
months through September, compared with 4.77 percent in the
eight months through August. Value-added tax receipts surged
11.9 percent in September from a year earlier as an increase
came into effect.

“All these developments and read-outs allow us to be
optimistic about reaching our budget objectives,” Deputy Budget
Minister Marta Fernandez Curras told reporters in Madrid late
yesterday. “The central government deficit is under control.”

Social Security

Still, the government said it would try to keep the central
deficit below 4 percent of GDP, to allow the social security
system to overshoot without endangering the overall targets.
Rajoy is also struggling to control regional spending, which
along with municipalities makes up the rest of the public-sector
balance.

The government needs to raise 60 billion euros in debt and
equity to fund a bad bank that it announced this week and Curras
said the administration also is weighing a bailout for toll-road
operators that are struggling to meet repayments on 4 billion
euros of project loans.

The state already bailed out banks, the power industry, the
regions and the construction industry as private sector losses
tumble onto the government’s books amid the country’s worst
financial crisis in more than half a century.

Spain’s economy contracted for a fifth quarter between July
and September as unemployment rose to the highest on record.
That adds to the burden on the social security system, which the
government is planning to finance this year by raiding its
pension reserves. The government had forecast the system would
balance its books this year even as it increased pensions.